What's in a Prospectus?

Imagine a company wants to raise money by selling shares to the public for the first time (IPO). The prospectus would explain what the company does, its future plans, how it makes money, and how much it's hoping to raise funds.

In other words - A prospectus is a formal document that gives information about an investment offering to the public and is required by the Securities and Exchange Commission (SEC) to be filed. Bonds, mutual funds, and stock offers need the filing of a prospectus.

Example of a Prospectus

• IPO Prospectus: This document contains potential shareholders about the company’s plans and business model.
• Mutual Fund Prospectus: Lists the product's objective, inclusions, exclusions, and fees.
• ETF Prospectus: Provides details about the fund's goals, history, portfolio, fees, and other financial information.

Types of Prospectuses

Red Herring Prospectus (RHP):

• A preliminary document without details on price or number of shares offered.
• Issued before an IPO.
• Contains all important information except for pricing details.

Shelf Prospectus:

• Allows a firm to issue securities in parts without filing a new prospectus for each offering within a specified period.

Deemed Prospectus:

• If securities are allotted to more than 50 individuals, it is called a public offering, and the document shared is treated as a deemed prospectus.

Abridged Prospectus:

• A shorter version of the prospectus that accompanies public issue application forms.
• Contains key features of the prospectus to keep investors well-updated.

Requirements for a Prospectus to Be Issued

A company should comply with the following requirements to be issued a prospectus:

1. The prospectus of a company should be filed with the local regulatory bodies and agencies like SEBI and stock exchanges.
2. It must be dated and duly signed.
3. It should contain all the necessary information outlined in the Companies Act 2013.
4. It should not contravene the Companies Act 2013 or provide misleading information.

What is a prospectus and its contents?

Think of the prospectus as an investment roadmap. It outlines crucial details mandated by the Companies Act, 2013, to help you navigate the opportunity clearly. Here's a closer look at some key points it typically covers:

1. Company Background: This section introduces you to the company, including its official name, registered address, and core business activities.
2. Management: Get to know the company's leadership team. The prospectus details the directors' credentials and their current shareholding within the company.
3. Investment Details: This is where you understand the specifics of the investment being offered. It outlines:
   • Type of Shares: Are they common shares with voting rights, or preferred shares with a fixed dividend payout?
   • Number of Shares Offered: This tells you how much of the company ownership is being made available through this investment.
   • Minimum Investment: This is the lowest amount you need to invest to participate in the offering.
4. Financial Performance: The prospectus often includes audited financial reports like profit and loss statements. This helps you understand the company's financial health and track record.
5. Costs and Fees: Be aware of any associated costs, like application fees, allotment charges, or ongoing management fees for mutual funds.
6. Risks and Disclaimers: No investment is without risk. The prospectus honestly outlines potential challenges the company faces and any disclaimers that investors should be aware of before committing.

The prospectus helps you understand the risks and potential rewards of an investment. Just like you wouldn't buy something without knowing what it is, you shouldn't invest without understanding the details of the investment.